When the Federal Reserve in the United States purchased a large quantity of long-term bonds,as it did during 2008-2010 with its quantitative easing policies,but most banks held onto their new reserves,the money multiplier ________ while the monetary base ________.

Question

Quizplus · Accepted Answer

When the Federal Reserve purchases a large quantity of long-term bonds, it increases the monetary base. However, if banks hold onto their new reserves instead of lending them out, the money multiplier decreases. This is because the money supply is dependent on both the monetary base and the money multiplier, which measures the amount by which the money supply increases for each unit increase in reserves. If banks are not lending, the money supply will not increase as much as it would if they were, resulting in a decrease in the money multiplier.

When the Federal Reserve in the United States Purchased a Large